GERMANY'S VEBA has agreed a 13.5bn euro (pounds 8.6bn) takeover of rival electricity giant Viag to create the third-largest utility in Europe's rapidly consolidating power industry. The planned merger comes after the liberalisation of the German power market last year triggered a price war similar to that raging in the country's telecommunications sector.

Veba shareholders will have a 67 per cent stake in the new group to Viag's 33 per cent. The company will be the largest listed utility in Europe and will rank only behind France's state-owned Electricite de France and Italy's Enel in size. It will have a market capitalisation of about 40bn euros.

The firms said energy and specialty chemicals would be the company's core business and that all other holdings save the Viag Interkom telecommunications unit and real estate management would be sold within three years with the proceeds feeding further growth.

"All the candidates that you would think could be on the disposal list are there, that seems positive," said Lynn Reinhardt, an analyst at Merrill Lynch in Frankfurt, adding that expansion would have to be a key focus of the new group.

Non-core holdings with annual sales totalling about 28bn euros, including Veba's E-Plus telecoms venture, will be sold when market conditions allow, the companies said.

The merger must be approved by the German cartel office and the European Commission. The German competition watchdog said last week it would not approve the merger under current market conditions. It said that for it to give the go-ahead there would have to be further liberalisation of the energy market, especially access to rivals' infrastructure for delivering electricity.

The merged group will be based in Veba's hometown of Dusseldorf. Veba will have seven members, including the chairman, on the supervisory board to Viag's three. Shares will be listed in Frankfurt and New York.